Policy Proposals Europe
Keidanren's View on Brexit-- Towards the right deal for sound and sustainable economic development --

(Provisional Translation)

14 March 2017Keidanren

Keidanren compiled and released its Preliminary View on Brexit#1 on August 10 of last year, following the UK referendum in which the British people chose to withdraw from the EU. In this document, Keidanren sought (1) to maintain stability in the financial and exchange markets, (2) to improve the predictability of the withdrawal process as much as possible, and (3) to maintain the highest degree of market integrity between the UK and the EU. At the same time, Keidanren raised ten key points to consider #2 during the negotiations over the withdrawal agreement and the new framework, with a view to avoiding major difficulties in the activities of Japanese companies operating in Europe. Moreover, on September 12, Keidanren released a joint statement with other G7 countries/regional economic groups (B7) which stated that they "will observe closely the relationship between the United Kingdom and the European Union following the Brexit vote in the hope that a new and balanced model will be found."#3

Fortunately, turmoil in the financial and exchange markets lasted only a short time after the referendum, and the markets have stabilized since. Nonetheless, for Japanese companies operating in Europe, unstable foreign exchange fluctuations are one of the most crucial management issues#4 and therefore we need to remain vigilant on market developments. Concerning the withdrawal process, UK Prime Minister Theresa May spoke at the Conservative Party Conference on October 2 last year,#5 where she said the UK would "invoke Article 50 no later than the end of March" this year, and procedures for initiating the Brexit process are currently underway. With regard to the negotiations following the withdrawal notification, Prime Minister May stated in her address at Lancaster House on January 17 this year#6 that the UK would reach "an agreement about our future partnership by the time the two-year Article 50 process has concluded" and that "a phased process of implementation" would take place. Since, however, the shape of the new partnership will depend on the outcome of the negotiations, it remains difficult to predict the outcome. The EU attaches the highest importance to the idea and principles of integration and intends to shape a vision for its future as the EU at 27, as this year marks the 60th anniversary of the Treaties of Rome.

Against this background, Prime Minister May, in the above-mentioned address, repeatedly stressed her determination to obtain the right results for the UK, by suggesting that no deal is better than a bad deal. The point is, as it is so understood, that the negotiations are to be made to avoid no deal. Going forward, the procedures to settle the WTO's schedules of concessions for the UK must be completed as soon as possible. These negotiations should be conducted for a new UK-EU partnership, aimed at ensuring sound and sustainable economic development, not for unilateral interest of any one party. To this end, it is essential to maintain market integrity between the UK and the EU and to improve the predictability of the withdrawal process to the highest level possible, ensuring that the business activities of companies operating in Europe, including Japanese firms, are not hindered. The items below are matters of the utmost importance in achieving such goals.

It should be noted that the Japan-EU EPA/FTA, whose negotiations are in the final stage, is expected to bind the UK and the EU together. With a view to preventing an upsurge in anti-globalism and protectionism in various parts of the world, this trade agreement should be realized as promptly as possible.

[ Addressed both to the UK and the EU ]

Realizing a "customs agreement" that is as close as possible to the present customs union: keeping UK-EU trade tariff-free and securing simplified customs procedures and highly convenient rules of origin (lowering the added value ratio, allowing choices between the added value ratio and change in tariff classification as rules of origin, and adopting accumulative rules of origin extended to FTA partner countries)

Prime Minister May stated that the UK could not fully stay in the customs union and hence would seek the greatest possible access to the EU single market through a new comprehensive, bold and ambitious FTA. She also said that the UK would aim to become an associate member of the customs union in some way, or remain a signatory to some elements of it, or enter into a new "customs agreement" to conduct tariff-free trade or frictionless trade with the EU. In the event that the UK leaves the customs union and concludes an FTA with the EU, it would be necessary to maintain tariff-free trade while clearing customs procedures and fulfilling the rules of origin. From this standpoint, customs procedures must be as simple as possible; the rules of origin must be highly convenient based on the above-mentioned measures; and the accumulative rules of origin should be extended to both present and future partner countries concluding FTAs with the EU.

Securing regulatory coherence between the UK and the EU across a wide range of areas

If the UK exits the EU and implements new regulations and standards that are different from those currently applied in the EU, companies will be compelled to take double or additional measures in response to the new situation. In the case where the UK and the EU must compete to attract investments, companies may suffer unexpected disadvantages from such competition. Therefore, the same regulations and standards as those currently valid in the EU should be maintained, or regulations or standards with the same effect should be ensured in the UK. If the unification of such regulations and standards proves difficult, they should at least be subject to mutual recognition. The following items have been pointed out by companies as being particularly important:

Continued application of international standards (UN/ECE) in automobiles

In the case where the single passport system is no longer be applied to the UK (even then, continued application of the system for firms already possessing a single passport is desirable), allowing them to establish branches and to offer cross-services by securing equivalence in financial services regulations.

(Even in the case where the European Medicines Agency moves out of the UK), continued participation of the UK in the European medicines regulatory network

Continued application of environmental regulations such as the REACH rules on chemical substances

Continued participation of the UK in the Single Euro Payments Area

Securing unified protection of intellectual properties

Continued freedom of movement in services, capital and cross-border reorganization between group companies in the UK and the EU

Freedom of movement in services (shared services such as in accounting and personnel) between group companies in the UK and the EU should be continued, withholding taxes on the movement of capital (distributed profits, interest and royalty payments) should continue to be exempted; and non-taxation measures should be maintained on cross- border reorganization between group companies in the UK and the EU.

Securing the rights currently enjoyed by EU nationals residing in the UK, and UK nationals in the EU (this issue should be realized swiftly by excluding it from the negotiations)

Prime Minister May stated that such rights (people who live continuously and lawfully in an EU member country for at least five years automatically gain the permanent right of residence, etc.) should be secured for EU nationals who live in the UK (about 2.8 million people, of which a substantial majority of 0.9 million are from Poland) and UK nationals living in the EU region (about 1 million people, of which the highest number, or 0.3 million, live in Spain) as promptly as possible, and that this request had been conveyed to the leaders of other EU member states. At the same time, she pointed out that not all EU leaders had agreed to this proposal. As the White Paper on the United Kingdom's exit from and new partnership with the EU states that the UK Government would prefer to resolve this issue ahead of the formal negotiations on leaving the EU, this item should be excluded from the negotiations and be realized swiftly.

Securing the free flow of data between the UK and the EU, and realizing the free flow of data among Japan, the UK and the EU

It is essential for businesses that the free flow of data between the post-Brexit UK and the EU be maintained without any disruption even after Brexit. By also ensuring the free flow of data between both Japan and the EU, and Japan and the UK, the free flow of data among the three parties should be realized.

Establishing a sufficient and seamless transition period in the case where simultaneous conclusion of the withdrawal agreement and new framework agreement (the UK-EU FTA) will not be realized

In the transition from their existing relationship to a new partnership with the EU, Prime Minister May said that it would be in no one's interests for business to be on a cliff- edge. To this end she wishes to reach an agreement on their future partnership by the time when the two-year period set out in Article 50 will end. She also suggested that a phased process of implementation would be in the mutual interest of the UK and the EU, as it would give businesses sufficient time to plan and prepare for new arrangements. While such a "smooth and well-ordered withdrawal" is desirable, its achievement would not be without considerable difficulties. In the case where simultaneous conclusion of the withdrawal agreement and new framework agreement cannot be realized, a sufficient and seamless transition period must be established from the withdrawal date up until the date when the new framework takes effect to ensure that companies' business activities under the current framework are not be forced to undergo substantial changes.

Upon review of the business strategies to the EU following Brexit, it will be important for companies to be able to smoothly and quickly complete incorporation procedures, including the acquisition of necessary licenses, for setting up new corporations in the UK or the EU. In light of this, the UK and the EU member states should make all the necessary preparations. Otherwise, the effect of establishing a sufficient transition period may be largely reduced.

[ Addressed to the UK ]

Securing an appropriate balance between immigration control and access to labor force (including workers without high skills)

Prime Minister May declared her intention to get control of the number of people coming to Britain from the EU, while also acknowledging the need to accept high skilled immigration. In reality, there are some industries which depend on workers who are not necessarily highly skilled. Therefore, a new immigration system should secure an appropriate balance between immigration control and access to labor force, including workers without high skills.

Securing preferential access to third countries outside the EU, with which the UK presently enjoys free trade as an EU member state, at a level equivalent to the current agreement

The maintenance of a free trade relationship between the UK and the countries/regions where Japanese firms have manufacturing sites, etc. (such as Turkey, South Africa and Mexico, among others) with which the EU has concluded FTAs, etc., is indispensable for Japanese companies. Necessary measures should be taken immediately after Brexit with a view to securing preferential access to such countries/regions.

(1) Keeping UK-EU trade tariff free and securing simple customs procedures (including highly convenient rules of origin); (2) Securing regulatory coherence between the UK and the EU; (3) Continued exemption of taxes on the movement of capital (distributed profits, interest and royalty payments) between group companies in the UK and the EU; (4) Continued freedom of movement in services (shared services such as in accounting and personnel) between group companies in the UK and the EU; (5) Continued non-taxation measures on cross-border reorganizations between group companies in the UK and the EU; (6) Continued application of the single passport system to financial services in the UK; (7) Securing the free flow of data between the UK and the EU; (8) Continued non-requirement of work visas in the UK and the EU; (9) Continued location of the EU organizations (especially the European Medicines Agency) currently in the UK; and (10) Continued EU support for ongoing projects in the UK.